Basic Foundations of Personal Trusts


There have been several attempts to give a holistic definition of a trust. It is worth noting that, within a single trust there can be several sub trusts. In accordance to Underhill in his book “Law of Trusts and Trustees” he defines a trust as “an equitable obligation binding a person (Trustee) to deal with property over which he has control (Trust Property) either for the benefit of persons (beneficiaries) of whom he may himself be one and any one of whom may enforce the obligation.”

It has been further highlighted by scholars that the major characteristics of a trust are:

    • It is a relationship;
    • It is a relationship with respect to property;
    • It is a relationship of a fiduciary character;
    • It involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another; and
    • It arises as a result of a manifestation of an intention to create the relationship.
      In Kenya, we have seen that upon the death of prominent personalities squabbles arise in the family which tarnish the image of such families. To avoid such scenarios, individuals should consider the use of living trusts instead of wills. The constitution and benefits of the living trusts will be looked at in depth in this article.
       

Essentials of a Trust

For a trust to be considered valid, there are three main essentials that need to be considered in the creation of a trust:
Certainty of Intention: the construction of words used in creating the trust must express the intention to set up the trust.

Certainty of Subject Matter: where the trust property or trust fund cannot be identified, such a trust is considered non-existent. Therefore in essence, the trust property should be defined into specifics and be able to be identified by the parties involved. It cannot be generally defined.

Certainty of Object: there needs to be certainty of the class of beneficiaries for whom the trust is created for.

Examples of Trusts
There are four broad examples of trusts as highlighted herein below:

    • Pension Trusts e.g provident funds and pension funds
    • Investment Trusts e.g. Unit Trusts, Real Estate Investment Trusts, Oil and Gas Royalty Trusts;
    • Regulatory Compliance Trusts e.g Nuclear Decommissioning Trusts, Environmental Remedial Trusts, Liquidating Trusts and Law Office Trust Accounts; and
    • Private/Individual Trusts e.g Testamentary Trusts and Intervivos/ Living Trusts

For our discussion, we shall consider the Personal or Individual Trusts.
Personal or Individual Trusts
There are two main types of personal trusts:-
a. Testamentary Trusts: this is set up in the will and it comes into effect upon the death of the testator. It is also called a trust under a will. The testator is the legal definition of a person who has written the will and leaves the will upon his or her death.
b. Living/Intervivos Trust: this is created while the settlor is alive where there is separation of control of the assets and benefit of the assets. The settlor loses control of the assets and it is vested in the trustees.

 Parties to a Living Trust

a. Settlor: this is the person who establishes the trust by transferring his assets to the trustees. The settlor must completely constitute a trust by transferring the assets to the trustees.
b. Trustees: this can be a natural person or an artificial person who receives the assets from the settlor and has the responsibility of administering the assets for the benefit of the beneficiaries. The trustee becomes the legal owner of the assets but cannot use the assets for the trustee’s benefit.
c. Beneficiaries: these may be individuals (including the settlor) or classes of persons who will and may become entitled to the income and capital of the trust.

Protector: in other jurisdictions he is also called the appointor. Though a relative new concept in our jurisdiction, this position is best described as a party who is given power under the trust deed instrument to protect the assets in the trust, has veto power over the trustees and appoints trustees and many other responsibilities. The position acts as a check and balance on the powers of the trustees for the benefit of the beneficiaries.

Constitution of a Living Trust
a. Letters of Wishes: this is an instrument that is drafted by the settlor indicating his or her intentions to the trustee as to the administration of the trust fund. Although not legally binding, it provides guidance to the trustees in all aspects of administration and management of the trust during the lifetime and after the demise of the settlor. This can be applied in both testamentary trust and living trust. It can give direction with regards to:

    • Management of capital
    • Tax mitigation
    • Funeral arrangements etc

b. Trust Deed: this is an instrument that contains the terms and conditions that governs the relationship between the settlor, trustees and beneficiaries in the management and control of the assets. It gives the trustee the power to carry out the wishes of the settlor. It is normally created by execution of both the settlor and the trustee. The execution by both parties provides clear evidence of the intentions of both parties and of the agreed obligations assumed by the trustee. This is called a settlement.
c. Transfer of assets to the Trust: for a trust to exist and be operationalized, the trust property or trust fund will have to be vested in the trustees. This transfer will vary with the various forms of properties being transferred, for example, with land it is registration of transfer, bills of exchange is by endorsement. In the case of Milroy v Lord , the settlor executed a voluntary deed purporting to transfer 50 shares in the Bank of Louisiana to the defendant to be held on trust for the plaintiff and later handed to him the share certificates. At the time the defendant held a general power of attorney which would have entitled him to a transfer of the settlor’s shares. However, the shares could only be transferred by registration of transferee in the books of the bank and this was never done. Question was whether a trust of the shares had been created in favour of the plaintiffs. It was held no trust was created.

Conclusion
The purposes of a personal or individual trust are:

  • Protection of Assets: this is against speculative litigation and security to assets that are open to expropriation by either the family members, partners in business or a specific beneficiary who is unable to control the use of his or her assets;
  • Succession planning: promote continued, responsible family involvement in the ownership and management of valuable business assets;
  • Confidentiality: by transferring shares in private companies or public companies to the trustees, it helps to hide the real beneficial owners of the shares; and
  • Estate planning: helps to prevent the rigorous probate formalities in ones jurisdiction only if the transfer of the assets was done at a time when the testator had capacity and of sound mind.

 

Disclaimer: This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing in this article is intended to guaranty, warrant, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall they be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.





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